Cannabis producer Aphria (NASDAQ:APHA) stock has made a huge comeback in since early November. Consider that the price went from $5.50 to $20. The market capitalization is now about $6 billion.
Of course, the timing of this rally coincides with the presidential election. With the Biden administration in the White House, the prospects look more encouraging for fewer regulations on the cannabis industry.
But there are other reasons to consider. After all, Aphria is merging with rival Tilray (NASDAQ:TLRY).
What will this mean? Well, I think the deal will be transformative for APHA stock and has the potential to lead to strong long-term gains.
Let’s take a look at three reasons for this.
Merger Terms For APHA Stock
After Aphria and Tilray merge, the combined entity will be called Tilray and the shares will continue to trade on Nasdaq under the ticker TLRY. Yet the terms of the deal look more advantageous to Aphria.
First of all, the company’s CEO and chairman, Irwin Simon, will remain at the helm. Aphria will also have seven directors and Tilray will have two.
Next, the economics of the deal are more favorable for APHA stock. The company will receive 0.8381 shares of Tilray and get about 62% of the ownership of the new entity.
Interestingly enough, based on these terms, APHA stock is trading at a discount. This actually presents an arbitrage opportunity, in which an investor can short Tilray and buy Aphria to lock in a gain. But this is certainly a sophisticated strategy. Although, assuming the deal does go through – as seems reasonable – then there could be a short-term increase in APHA stock.
Even with the growth opportunities of the cannabis market, there is something else needed for a successful company: scale. Having a cost advantage is extremely important especially as markets get saturated.
This is why Aphria’s merger with Tilray is so critical. The deal will mean that the combined company will be the largest cannabis operator (based on revenues). There will also be significant cost reductions. The estimate is that they could hit about $78 million within the next couple years. But this could be a conservative number.
Yet there are also major business synergies with the merger. The new entity will be the clear leader in the Canada market, which has continued to see strong growth.
What’s more, the recreational business will have a strong set of brands, which span from low-cost to premium offerings. Some the products include Riff, Good Supply, B!ngo and Solei from Aphria as well as Grail, Dubon, Canaca and The Batch from Tilrary.
Then there is the thriving medical business, which has a global footprint. Aphria’s CC Pharma division is a leading importer and distributor in Germany. As for Tilray, it has a strong business in Portugal.
Finally, the new entity will be positioned nicely in the U.S. market. To this end, Aphria has its SweetWater Brewing segment, which is a craft beer manufacturer and distributor. The division has a presence in 27 states. And then Tilray has its U.S. Hemp and Wellness platform, which has distribution in 17,000 stores and a line of BD products.
Cannabis does look like a secular growth market. And it is global. According to research from BDSA, the spending is expected to hit a hefty $55.9 billion by 2026. This represents a 17% compound annual growth rate.
But the opportunity in the U.S. could easily boost these numbers. The forecast is for spending to hit $41 billion by 2025, which would represent a 21% CAGR.
Now the enthusiasm for the U.S. market may be overly optimistic. For the most part, the Biden administration is laser-focused on combating the Covid-19 pandemic. There is also a razor-thin majority in the Senate.
However, as seen in the last election, more states are moving towards legalization. So, it does seem that eventually there will be the same on the federal level in the coming years.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.